ExportLawBlogLatest News on DDTC, BIS, OFAC, and other export law matters2015-03-30T17:27:59Zhttp://www.exportlawblog.com/feed/atomClif Burnshttp://ClifBurnshttp://www.exportlawblog.com/?p=68292015-03-30T17:27:59Z2015-03-30T17:15:01ZI’ll admit it and apologize in advance. The main reason for this story and for this link to Britain’s worst newspaper is so that I can run the picture of Ariel Maralit. Ariel, the guy in the photo on the right brandishing the weapons and wearing the moronic grin, is the brother of former NYPD officer Rex Maralit and former U.S. customs agent Wilfredo Maralit. Both former law enforcement brothers have now pleaded guilty to violations of the Arms Export Control Act in connection with a little business they ran with brother Ariel in the Philippines. Seems Ariel would take orders from customers in the Philippines for AR-15s, semi-automatic weapons and assault rifles and would then send these orders on to brothers Rex and Wilfredo in the United States. The brothers would use their law enforcement discounts to buy the weapons cheaply and then pack them up and ship them to Ariel for a tidy profit. Rex is quoted as saying he just thought he was “avoiding red tape.” Wilfredo’s lawyer said he was just in it for the money.

And now for the best part. Rex and Wilfredo

were told they would receive a lighter sentence if they could convince their brother Ariel to come to the United States and face charges, but the brothers were unsuccessful.

Allegedly Ariel replied to his brothers’ pleas to give himself up by sending them a recording of “Baretta’s Theme.” You remember: “Don’t do the crime if you can’t do the time.” Okay, I made up this last part about sending the song, but once you start linking to the Daily Mail, it’s hard not to follow their example.

]]>0Clif Burnshttp://ClifBurnshttp://www.exportlawblog.com/?p=68262015-03-27T12:04:24Z2015-03-27T12:04:24ZInternet payment facilitator PayPal recently agreed to pay to the Office of Foreign Assets Control $7,658,300 in fines and penalties to settle charges that it processed 486 financial transactions involving embargoed countries and blocked parties on OFAC’s Specially Designated Nationals and Blocked Persons List (the “SDN List”). The magnitude of this penalty becomes apparent when you consider that the 486 transactions amounted to a total of $43934.02 in transactions averaging $90.40 each.

Oh, and in case you were thinking, well that’s what they get for getting caught, you should realize that these violations were, according to the Settlement Agreement, voluntarily disclosed. Worse yet, this huge fine was imposed even though PayPal cooperated with the investigation, tolled the Statute of Limitations, and sacrificed on the altar of OFAC’s wrath its compliance division’s entire management, all of whom are now looking for new employment.

What seems to have gotten OFAC’s dander up, and led to the agency calling this an “egregious” case, pretty much the ne plus ultra of regulatory misdeeds, involved PayPal’s dealings with Kursad Zafer Cire, an A.Q. Khan crony designated by OFAC under its WMD sanctions program. Although these were only 136 transactions, totalling $7091.77 and averaging $52.15 each, PayPal processed six of these transactions after its interdiction software flagged this guy. On the sixth occasion, PayPal asked Cire to fax them his passport, which he dutifully did, and even though the passport conclusively matched the information on the SDN List, the PayPal risk officer let the transaction go through.

]]>0Clif Burnshttp://ClifBurnshttp://www.exportlawblog.com/?p=68212015-03-26T02:02:08Z2015-03-26T02:02:08ZYesterday the Office of Foreign Assets Control (“OFAC”) quietly removed a number of Cuba-related listings from its Specially Designated Nationals and Blocked Persons list. These delistings included dissolved companies, dead people and Cuban ships that had either sunk or were out of commission. For example, Amado Padron Trujillo, designated in 1986,was executed in 1989. By Cuba. For treason. Talk about a guy who couldn’t get a break.

Also delisted was the late Alfred Stern, who was once accused of spying for the Soviet Union. He fled the United States, lived in Cuba from 1963 to 1970 and died in Prague in 1986. Another dead man taken off the SDN List was Carlos Duque, a business partner of Manuel Noriega, who stopped threatening the United States when he died last October.

Even though OFAC delisted dead people and sunken ships from the SDN List, it still could not bring itself to delist the probably fictional Daniel Garcia, who allegedly threatens the United States by running a non-existent talent agency, Promociones Artisticas (PROARTE), in Mexico City. The problem with designating a non-existent Daniel Garcia is that there are plenty of real people named Daniel Garcia who, as a result, cannot open bank accounts, get loans, buy automobiles, or get on an airplane without getting searched. We wrote about the curse of being named Daniel Garcia here.

I have been told, off the record, that no one at OFAC knows who Daniel Garcia is or was, if he ever was, and why he was put on the list in the first place. That, I’m told, is part of the reason that Daniel Garcia is fated to remain on the SDN List in perpetuity.

In short, since imaginary people never die, the real Daniel Garcias of the world are just going to have to live with it.

As most readers of this blog know, the venerable Shipper’s Export Declaration was discontinued in 2008. Instead, exporters now file the Electronic Export Information using the Automated Export System.

Apparently the news of this change has yet to make its way into the Justice Department, which recently indicted a California man, Pavel Flider, and his company, Trident International, for “false and misleading export information … in an SED” with respect to fifteen exports made between 2011 and 2013, long after said “SED” had been definitively retired.

Oh, and because those statements on the non-existent form were false, the DOJ charged him with violating the anti-smuggling statute, 18 U.S.C. § 554, which covers any export made “contrary to any law or regulation of the United States.” I’ve criticized this ridiculously overbroad statute before, noting that it turns a trucker on his way to Canada who drives 10 hours and 1 second in a day into a smuggler and a felon. Here the rule violation that turned the defendant into a smuggler was the false statement “in an SED.”

The DOJ press release contains allegations not included in the indictment, namely that “many” (but not all) of the items at issue were “controlled dual-use programmable computer chips capable of operating in austere environments making them useful in both civilian and military applications.” If that truly is the case, you have to wonder why they are just charging the defendant with false SED statements rather than a simple export violation.

Of course, I can imagine that there will be plenty of fun in the courtroom when the prosecutors, who don’t even know which forms are filed with exports, accuse the defendants of making mistakes when they filed their export documentation.

Everybody knows that you can go to jail for exporting a tank to China. But did you know that you can go to jail for exporting a luxury car, classified as EAR99, to China?

Well, it appears that you can. According to an article in the Milwaukee Journal-Sentinel, Mao Peng, a resident of Kenosha, Wisconsin, and his wife were arrested in Los Angeles for exporting luxury vehicles to China and sent back to Wisconsin for trial. Only the terminated criminal proceedings in Los Angeles are in PACER at the moment. The transferred case in Wisconsin has not shown up yet in PACER, so details of the charges are somewhat hard to discern.

But it appears from a number of news sources, like this article in the New York Times, that federal prosecutors have been targeting individuals who purchase luxury vehicles in the United States and then export them to China for resale. Apparently, there is a substantial price differential between the price of luxury vehicles in the U.S. and China creating an attractive arbitrage opportunity for ambitious entrepreneurs. And the auto manufacturers have some how enlisted the DOJ to help them preserve their high margins in China.

At the behest of luxury car manufacturers, the U.S. Government has been seizing cars and bank accounts, but at least one federal judge has called foul. The opinion in that case gives some clue as to the prosecutors’ theories in the luxury car export cases. In that case, the Secret Service seized bank accounts alleged to contain funds derived from an auto broker’s export business. Because luxury auto dealers are prohibited by their manufacturers from selling cars for export, dealers require purchasers to sign, in the purchase documentation, a representation that the cars are for their own use and not for export. The export brokers pay straw purchasers to buy the vehicles for them. The government’s theory is that the brokers are conspiring with the straw purchasers to commit wire fraud in connection with the personal use representations by the straw purchasers. The district court held, relying on the “convergence” requirement, that the misrepresentation was at most a contractual violation rather than a criminal matter because the auto dealers to whom the misrepresentation were made were not injured by the misrepresentation; only the manufacturers were.

Peng’s case, which appears to be the first criminal prosecution for exporting cars to China, may be somewhat different because it appears that his straw purchasers were Native Americans and that sales taxes were therefore not paid on vehicles delivered to reservations on which they lived. It also appears that the government is alleging that Peng was continuing to use the names of the straw purchasers for more purchases than they had agreed to and that this was some kind of identity theft. But, according to the Journal-Sentinel article, it also appears that the government’s case is primarily based on the non-export representations made by the straw purchasers to the auto dealers.

]]>3Clif Burnshttp://ClifBurnshttp://www.exportlawblog.com/?p=68052015-03-18T03:51:18Z2015-03-18T03:51:18ZHere’s a bad idea: apply to the Office of Foreign Assets Control for a license to sail from Martha’s Vineyard to Cuba, have it denied, apply again, never hear back, then decide to go anyway and have the Martha’s Vineyard Times publish a story on your trip. Well, that’s what a guy named Nat Benjamin did and you can read all about it here in the Martha’s Vineyard Times.

Although he timing of the trip is not entirely clear, it appears that Benjamin, who set sail for Cuba in November 2014, arrived in Cienfuegos, Cuba, perhaps luckily for him and his crew, after the new Cuban sanctions rules went into effect on January 15, 2015. According to the Martha’s Vineyard Times article. Mr. Benjamin decided to head for Cuba without the license required at the time of his departure “in hopes that the humanitarian nature of his trip would trump any troubles.”

The question then is whether Mr. Benjamin’s trip fits within the new general license for humanitarian visits set forth in section 515.575 of the Cuban sanctions regulations.

While in Cuba, Mr. Benjamin traveled throughout the country and shared his boatbuilding experience. He was able to contact wooden boatbuilders in the Cuban city of Trinidad.

Mr. Benjamin said Cuba’s wooden boatbuilding industry is not well known outside the country. He partnered with some boatbuilders, hoping to learn about their work, and donated much-needed tools.

Section 515.575 sets forth fairly specifically the sorts of projects that qualify as humanitarian projects, and learning about the work of Cuban boatbuilders, seems to be on the outside edges at best. Here’s what is permitted:

The following projects are authorized by paragraph (a) of this section: medical and health-related projects; construction projects intended to benefit legitimately independent civil society groups; environmental projects; projects involving formal or non-formal educational training, within Cuba or off-island, on the following topics: entrepreneurship and business, civil education, journalism, advocacy and organizing, adult literacy, or vocational skills; community-based grassroots projects; projects suitable to the development of small-scale private enterprise; projects that are related to agricultural and rural development that promote independent activity; microfinancing projects, except for loans, extensions of credit, or other financing prohibited by §515.208; and projects to meet basic human needs.

Maybe this was non-formal educational training on vocational skills, but, even if it does, Mr. Benjamin also needs to be able to prove that he and everyone else devoted a full-time schedule in Cuba to these activities. Having set sail for Cuba before the new sanctions were in effect and with only a vague humanitarian purpose, Mr. Benjamin may not be able to provide this documentation. Perhaps Mr. Benjamin, his wife and his crew are in the clear on this, but this illustrates the potential difficulty in relying on the new general licenses for travel to Cuba without careful preparation and documentation.

]]>0Clif Burnshttp://ClifBurnshttp://www.exportlawblog.com/?p=67962015-03-11T03:06:44Z2015-03-11T03:06:13ZThe owner of a Jerry’s Subs and Pizza franchise in Upper Marlboro, Maryland, pleaded guilty to shipping various rifles and rifle parts, including magazines, receivers, and sights, to Pakistan without the required license from the Directorate of Defense Trade Controls. According to the DOJ press release announcing the plea deal, Kamran Malik, the defendant, shipped the goods in packages with false return addresses and false descriptions of the contents. There is no indication as to the intended recipients of the firearms and parts in Pakistan. As part of the plea deal, the Government has agreed to argue for a reduction in the offense level from 26 to 23, which would reduce the maximum penalty from 78 to 57 months.

Something else is going on here. There is also a sealed plea agreement supplement. That normally means that the defendant will be a cooperating witness and that the sealed supplement contains a cooperation agreement. The purpose of sealing that information is to protect the cooperating defendant. Of course, since such supplements pretty much signal that the defendant is going to cooperate with the government, that purpose is largely lost. I suspect this means that the recipients of the items in Pakistan are of more than passing interest to the United States Government.

]]>1Clif Burnshttp://ClifBurnshttp://www.exportlawblog.com/?p=67912015-03-09T21:23:08Z2015-03-09T21:23:08ZColombia recently detained the Chinese vessel Da Dan Xia after it entered the port of Cartagena to unload part of its cargo. Based on an anonymous tip, Colombian officials searched the boat and found a boatload, so to speak, of weapons: 100 tons of gunpowder, just under three million detonators, 99 projectiles and approximately 3,000 cannon shells. All destined for Cuba. The ship’s documentation listed none of these goodies correctly, instead calling them spare parts and chemicals, and so the captain of the ship was hauled off the boat and arrested.

The Cubans aren’t saying anything and the Chinese are saying stupid things.

China’s foreign ministry said on Wednesday that the ship had been involved in “normal trade co-operation”. Hua Chunying said the ship was carrying ordinary military supplies to Cuba and was not in violation of any international obligations.

]]>0Clif Burnshttp://ClifBurnshttp://www.exportlawblog.com/?p=67862015-03-05T02:58:08Z2015-03-05T02:58:08ZOn March 3, 2015, a small DC law firm filed a complaint against the Directorate of Defense Trade Controls (“DDTC”) seeking, inter alia, injunctive relief prohibiting DDTC from applying its brokering rules to the provision of specified types of legal advice. This blog previously has discussed the potential application of part 129 brokering rules to the activities of lawyers on behalf of their clients. As we stated, the broad language of part 129 always arguably covered legal work on behalf of clients, but no lawyers ever registered as brokers and DDTC never complained. When DDTC amended the brokering rules, it arguably then explicitly decided to start covering legal services. The interim rule does exempt legal advice, specifically noting, in the Federal Register notice at least, that legal advice about export compliance was within the exemption. The situation was then muddied when DDTC published FAQs on the brokering rules which said that common legal services, namely, “structuring a transaction” involving defense articles or negotiating contract terms involving defense articles was outside the scope of the exemption.

The plaintiff in the recently filed lawsuit optimistically (and some might say foolhardily) requested from DDTC an advisory opinion stating that certain legal services, such as advising on the structure of transactions involving defense articles and drafting contracts for the sale of defense articles, were outside the scope of Part 129. Not surprisingly, the request for an advisory opinion languished at DDTC for months, despite the plaintiff’s repeated communications with DDTC asking them to act on the advisory opinion request. Finally, according to the complaint, and eleven months after the request was made, a DDTC official called plaintiff and said the rules did not cover the activities specified in the request, and plaintiff, based on those representations, agreed to withdraw the request.

Seven months later, on February 24, 2015, in a plot twist worthy of Franz Kafka, the same DDTC official sent a letter to plaintiff and, incredibly, retracted the previously provided advice:

Please be advised that your letter of August 29, 2013 and our conversation which took place on July 3, 2014, lacked sufficient detail for the Department to make an official determination as to whether the activities discussed constituted brokering activities.

The official asked the plaintiff to submit another advisory opinion request. The understandably frustrated plaintiff filed a lawsuit instead.

There are, of course, a number of problems with applying Part 129 to legal services beyond the provision of legal advice on export compliance. To begin with, lawyers will need prior permission from the State Department under section 129.4 before becoming involved in transactions involving specified defense articles such as night vision equipment. Worse, section 122.5 would require lawyers to make all records relating to these transactions available to DDTC and law enforcement in violation of attorney-client privilege.

The good news, of course, is that DDTC’s bizarre volte-face on the applicability of Part 129 to legal services is unlikely to be favorably viewed by the court and means, I think, that the initial advantage in this lawsuit is with the plaintiff.

On February 25, Mozaffar Khazaee, a former employee of various defense contractors, pleaded guilty to illegal export of ITAR-controlled technical data to Iran. The case started with an audacious shipment from Connecticut to a freight forwarder in Long Beach, California, by Khazaee of 44 boxes labelled as household goods that, in fact, contained numerous manuals and other technical documents relating to the F35 Joint Strike Fighter and military jet engines. The boxes were intended for ultimate shipment to Iran. Further investigation revealed that these documents had been taken by Khazaee from defense contractors for which he worked and that taking these documents violated the contractors’ rules requiring return of all documents at the end of employment. Khazaee was initially arrested for charges, set forth in the criminal complaint, of illegally transporting stolen property across state lines.

Khazaee’s ultimate plea was for violation of the Arms Export Control Act. The superseding information that served as the basis for the plea, however, alleged the export of only one document (out of the 44 boxes of documents) which was asserted to contain controlled technical data designated under Category XIX(g) of the United States Munitions List.

Two things stand out about this case. First, the superseding information charged, and Khazaee pleaded guilty to, export of the document and not attempted export of the document. The problem is the document was seized in Long Beach and never left the country. Section 120.17 of the ITAR defines export as “taking a defense article out of the United States.” No matter what your feelings may be about Long Beach, California, it is definitively still in the United States last time I checked. There is some evidence that the boxes may have been loaded onto the Panamanian-flagged NYK Libra. But given the definition of United States in section 120.13, it is hard to argue that the document left the United States until the NYK Libra did.

The second thing of interest were statements made by Khazaee, and cited in the superseding information, to potential employers in Iran that his job advancement in the United States had been hindered by his Iranian nationality even though he was an American citizen.

Even though working industry being very exciting, with best pay salary and high-tech events, my original nationality being Iranian (which I am very proud of), has caused me tremendous issue and hindrances towards my progress and goals. I can’t make any publication in current job (everything is very proprietary and restricted, mostly military projects), I was rejected to participate in the new advance engine program (this is beyond F135 engine, it’s called AETD), purely based on my original nationality. This is the primary … reason for my consideration to move to Iran.

Obviously one wrong does not justify another. However, discrimination against a U.S. citizen based on his national origin,if this is what occurred here, is a violation of federal law. And given the unhealthy obsession of the DoD and DDTC on national origin, at least with respect to dual and third-country nationals, it seems at least possible that this may have occurred. It may well be that the best way to encourage loyalty among American citizens is to treat them all equally without respect to where they were born.